MANAGERIAL ACCOUNTING

GROUP CASE STUDY 1

Prepared by : Approved by :

Signature

NORAINI BINTI Mohd Irshahrezal Bin DR. RAJA ADZRIN

Name
DOLLAH Muhamad Rasidi BINTI RAJA AHMAD

(Matrix DR. RAJA ADZRIN

2019854602 2019468836
number) BINTI RAJA AHMAD

Date 19 SEP 2019 19 SEP 2019

Table of Content:

no content page

1. abstract 3

2. background of study 4-6

3. purpose of study 6

4. objective of study 7

5. Financial implication 8 - 15

6. conclusion 16

7. appendices 17

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 EXECUTIVE SUMMARY
COST-VOLUME-PROFIT (CVP) ANALYSIS

ABSTRACT

The article presents the “cost‐volume profit analysis (CVP)” for the accommodation industry.
Managers are constantly making decisions that affect profit. One of the decision‐making
areas which is crucial to all managers concerns profit planning. Attempts to show how cost‐
volume‐profit (CVP) analysis, aided by the computer spreadsheet, can be applied to the
practical profit planning situation in the hospitality industry. Paradoxically, CVP analysis is
one of the most widely referred to techniques in managerial accounting, but all too often it is
not used to its full potential in the operating environment. Aims at encouraging greater use of
the CVP approach to hospitality profit planning.

Keywords: managerial accounting, CVP analysis, accommodation industry, break-even point

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1.0 BACKGROUND OF STUDY

1.0.1 INTRODUCTION OF THE COMPANY

Company name : De Green Villa Homestay

Business Type : Accommodation Industry (Holiday Home Rental)
Paid-Up Capital : MYR 20,000
Business Owner : Mr. Mohd Suhairi Bin Sulong and;
Mr. Mohd Khairul Fadzli Bin Md Ali

De Green Villa Homestay is 6000sqft unique L shape structure bungalow located in JB, well-
equipped with various facilities which able to accommodate travellers with large companies
and/ or for other specific use such as event/ functions etc. Main features of the house is 6-
bedrooms, 6-bathrooms, a pool with Jacuzzi and outdoor barbecue grill.
The asset were properly controlled and maintained by owner themselves supported by
trained personnel in order to provide continuous satisfaction towards their customers.

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1.0.2 Objective:

 Aims to provide luxury and peaceful homestay business in town.

 To produce high quality services towards customer(s) in homestay industry.

1.3 Declared Facilities:

Below are details of facilities available in De Green Homestay;

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1.1 INTRODUCTION OF CVP

Cost- volume- profit analysis according to Glautieret al (2001) is the systematic examination
of the inter-relationship between selling prices, sales and production volume, cost, expenses
and profits. The above definition explains cost-volume- profit analysis to be a commonly
used tool providing management with useful information for decision making. Cost- volume-
profit analysis will also be employed on making vital and reasonable decision when a firm is
faced with managerial problems which have cost volume and profit implications.
More especially cost -volume-profit analysis is used by managers to plan and control more
effectively and also to concentrate on the relationship among revenues, cost, volume
changes, taxes and profit. It is also known as break-even analysis. Finally this study is aimed
at examining the effect of cost- volume-profit analysis on decision making process of some
selected manufacturing industries in Malaysia.

2.0 PURPOSE OF STUDY

Quantitative methods were used when conducting the study. The purpose of this thesis is to
examine the application of cost-volume-profit analysis. The analysis includes the evaluation
of into which degree the implementation helps with profit maximization. The evaluation was
done by studying the interrelation of CVP analysis elements. The information CVP analysis
provides can be used by the managers to evaluate how much a decrease in production
volume affects the profit. Cost accounting helps to clarify the cost structure, which enables
correct pricing and provides more data of the company’s viability. In small enterprises, CVP
analysis is simple to execute using an Excel spreadsheet.

The main goal of the thesis was to examine the costs, pricing and profitability of the case
company under different scenarios. This information was used to provide precise
contribution margin calculation as well as cost calculation models for the company which all
would be easy to control. Applying the knowledge acquired from the models into decision
making, it becomes easier for the managers to keep track on the costs used for production
and administrative expenditures. Thus, the pricing decisions become more accurate if all
costs are monitored. The second goal was to provide acquaintance of different pricing
methods and to choose the most suitable method for the case company for the
computations.

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3.0 OBJECTIVE OF STUDY

 To know that Break-even analysis.

 To Study Cost management.
 To Evaluate Costs and Financial modelling.
 To know that Profitability and Uncertainty.

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4.0 FINANCIAL IMPLICATION

CVP INCOME STATEMENT DE GREEN HOMESTAY

FOR THE MONTH ENDED 31, JULY 2019

SALES

De Green Villa (10 nights) RM15,000.00

RM15,000.00

VARIABLE COSTS
Income of 2 share partner RM5,000.00
Salary of cleaners RM1,500.00
Operation costs RM770.00
Costs of laundry RM250.00
Allowance of mileage RM200.00
Allowance for extra job RM30.00
Bill of SAJ RM100.00
Bill of TNB RM1,000.00
Others expenses RM150.00
RM9,000.00

CONTRIBUTION MARGIN RM6,000.00

FIXED COST
Rental of villa RM5,800.00
Internet Villa RM200.00
RM6,000.00

NET INCOME RM0.00

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CVP Graph on FC & VC Behaviour

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CVP GRAPH

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4.1 COST-VOLUME-PROFIT ANALYSIS

Cost-volume-profit analysis (CVP) studies the connection between variations in sold units,
sales mix, sales price, variable costs and fixed costs compared to a company’s total costs
and revenue. The main goal of CVP analysis is to determine the optimal level of production
to maximize profitability of a company. It is vital for managers to understand how costs
behave in order to conduct budgets and profit planning. Information acquired by CVP
analysis can be used for evaluating the business profitability.

4.2 Usage of Cost-Volume-Profit Analysis

The cost-volume-profit analysis determines the contribution margin of a product, and

thereafter the break-even point, target profit and degree of operating leverage. These
components of the CVP analysis are discussed later in the subchapters. The information
acquired from these sections can then be used to conduct a sensitivity analysis for the
company. (Hansen, Mowen, 2006). Analyzing cost, volume and profit of a product helps
managers to understand why the product behaves in a certain way when there are variations
in selling price, costs or output (Horngren, Datar, Rajan, 2012). Variable costing has been
proved to be very useful when conducting CVP analysis or making managerial decisions
which include contribution margin.
The CVP analysis is based on estimations in order to measure the costs of manufacturing a
certain product or a product mix (Kee, 2007). Analyzing cost data by each calculation target
simplifies the planning and tracking of a company’s expenses. The information allows
companies to verify the efficiency of their strategy and focuses on the problematic sectors.
The company’s overall performance could be positive although one product might be
creating loss. Conducting the cost- volume-profit analysis assists also with maximizing the
efficiency of production.

4.3 Cost-Volume-Profit Analysis Assumptions

Utilizing the cost-volume-profit analysis, managers must take into account several
assumptions that CVP analysis expects. Not taking the suppositions into consideration could
lead to false results and wrong managerial decisions. The conditions under which CVP
analysis can be practiced are described below.

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1. Total costs can be classified as variable costs or fixed costs. Variable costs fluctuate with
changes in the production output whereas fixed costs remain constant whether there are
variations in the units sold or not.
2. The variable cost per unit, selling price and fixed costs are identified and remain constant
under a relevant time period. Thus, the total revenue is only affected by changes in
quantities of units sold and the revenue function is linear;
3. The product mix is unchanging. Companies with multiple products manufacture goods
according to the projected product mix ratios.

4.4 Contribution Margin

Contribution margin calculation is one of the valuable methods when evaluating, managing
and planning the company’s profitability and profit planning. The formula for calculating
contribution margin is practical and simple, providing results that support short-term
decisions. (Jormakka, Koivusalo, Lappalainen, Niskanen, 2015). Contribution margin
alongside with production is an essential factor when developing the business.
A necessity before conducting contribution margin (CM) calculation is to divide costs
between fixed and variable costs. CM equals sales revenue minus total variable costs, and it
is commonly used for internal analysis. The CM does not indicate profit; it is the amount of
money left to cover fixed costs. Higher contribution means increase in profit or reduction of
loss. (Walther, Skousen, 2009). When pursuing profitability, managers need to make sure
that the contribution margin covers all fixed costs and the target income they want to
achieve. The structure of contribution margin income statement is presented in Table 1.

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 Table 1. Contribution Margin Income Statement

TOTAL P ER UNIT

S ALES

(10 NIGHTS OF RM 15,000 RM 1500/ UNIT

BOOKING)

VARIABLE COS TS RM 9,000 900/ UNIT

(VC)

CONTRIBUTION COS T RM 6,000 600

FIXED COS T RM 6,000

NET INCOME 0.00

4.5 Break-Even Point

Break-even point shows how many units should be sold in order to the total costs to equal
total sales revenue, thus, the point where there is no gain or loss. Analyzing the break-even
point is used to study the relationship between cost, volume and profit. (Aurora, 2009).
Achieving break-even is not satisfactory for most companies as it means generating zero
profit. Therefore, the break- even point is commonly used for calculating target income.
Break-even point can also be further applied for pricing decisions.
Monitoring the operations and profitability of a company, break-even point is an important
indicator, signalling whether the business is going to a right direction. If the sales decline
below the break-even point, it indicates that the company can no longer cover its fixed costs
without additional funding from external financiers. Especially in small companies or in
companies which are in their start-up phase, the analysis of break-even point is crucial.
Without the analysis it is impossible for the managers to know how many units must be sold
to cover all costs, or to generate profit. If the break-even point is reached and exceeded, the
excess money can be used for improving the working environment. This can also motivate
employees as they have clear picture of what needs to be achieved.

Mathematical Equation :
Sales – Variable Cost – Fixed Cost = 0
RM1,500Q – RM 9,00Q – RM 6,000 = 0
RM 600Q = RM 6,000
Q = 10 nights

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4.6 Margin of safety

Margin of safety shows the units sold or the sales revenue earned above the break-even
point. Thus, if the company has large margin of safety, it can still make profit even if sales
decrease. Generally, low fixed costs improve the margin of safety. The evaluation can be
made by predicting future probabilities by using estimated units or revenue or assessing
current risks by taking actual numbers from ongoing processes into consideration. (Aurora,
2009). Analysis of the margin of safety is important since the results show towards which
direction the company is moving. A declining margin of safety indicates that either the costs
are increasing or sales are decreasing.

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 Margin of Safety = Actual or Estimated units − Revenue at breakeven point
sales
= RM22,500 – RM 1500

= RM 7500

Margin of Safety ratio = Margin of safety in RM / Actual sales

= RM 7,500 / RM 22,500

= 33%

4.7 Target Profit

Achieving the break-even point does not generally fulfill the managers’ needs. This creates
the demand for calculating the target income. Target profit can be determined by the sales
revenue or number of units necessary to sell in order to reach the target point. It is calculated
by adding the desired profit to fixed costs. (Hansen, Mowen, 2006). Accepting or applying a
certain strategic decision without making loss creates a need for expanding the CVP analysis
with the computation of target profit (Guidry, Horrigan, Craycraft, 1998). The target profit
should not be an absolute figure but more of a directive for the managers to follow as it
assumes that fixed costs remain constant.
For small business owners, the calculation of target income gives a valuable insight for
planning operations. For a manufacturing company, the number of units to be sold allows the
managers to plan their production more precisely. Sales revenue to be earned shows
whether a certain decision is too expensive or if it can be implemented.
Assume that the manager of De Green Homestay target net income is RM 10,800.

Sales – Variable Cost – Fixed Cost = Target Net Income

(1500Q – 900Q- 6000 = RM10,800

600Q = RM 6,000 - RM 10,800

Q = 28 NIGHTS

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5.0 CONCLUSION

Based on the research conducted in this study, it has been observed that cost-volume-profit
analysis is a veritable tool in the decision-making process of accommodation industries.

Cost-volume- profit analysis to be a commonly used tool providing management with useful
information for decision making. Cost- volume-profit analysis will also be employed on
making vital and reasonable decision when a firm is faced with managerial problems which
have cost volume and profit implications.

APPENDICES

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Irwin.
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th
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